Will Mexico's Economy Finally Start To Grow In 2016?

A few weeks ago I walked with Carlos Salcido, a 50-year-old executive at luxury retailer Palacio de Hierro through the company's flagship department store in Polanco, one of Mexico City's wealthiest neighborhoods. Salcido strolled passed well dressed parents and younger customers in private school uniforms and pointed out the in-store boutiques from brands such as Hermes and Tiffany. “Polanco isn’t just the heart of Mexico City, it’s the heart of Mexico. Many brands will have their flagship Mexico or Latin American store here,” he told me. Palacio de Hierro recently made a $300 million investment in its Polanco store and is betting big on Mexico's luxury market. “In the last 20 years, we’ve had double digit growth every year. We can see luxury growing and growing," Salcido told me. Overall, despite concerns about a drop in the peso's value and rock bottom oil prices, Salcido is optimistic about Mexico's economy. “The top [income bracket] is growing but you have a middle class that is earning more and starting to come in,” he explained.

Mexico is the second-largest economy in Latin America, just after Brazil. With 122 million residents, Mexico has about the same number of potential customers as Spain, France and Portugal combined. The challenge for retailers, however, is that for all the talk of Mexico’s emerging middle class, just under half the country’s population still lives below the poverty line.

Modern Mexico is a deeply divided economy. In all, there are more than 145,000 individuals in Mexico each with a net worth over $1 million dollars, (not including the value of their primary residence.) The rest of the economy is in much worse shape. While the wealthiest 10% of households earn an average of just over $33,000 dollars a year, the next wealthiest income bracket earns less than half as much.

According to Forbes' Billionaires List there are 16 billionaires in Mexico. While Mexico's top ten billionaires have a combined fortune worth $135 billion, at the other end of the spectrum, Mexico is home to 12 million people who earn less than $2,000 a year.

Mexico's economy has bounced back from the 2008 global financial crisis but most people in the country aren't enjoying the benefits. While Coca-Cola, Pepsi, and Anheuser-Busch InBev are are all generating impressive sales in Mexico, manufacturers of big-ticket items such as GM and Ford are struggling to sell cars to Mexicans. On February 5, I tweeted this article from Mexican newspaper El Financiero that explains that in 2015 Mexican beer consumption rose by 7.3% around three times the increase in growth in the overall economy. By contrast in 2015 Mexicans purchased just over one million cars, about 5% of the number of cars sold in the US during the same year.

Data from the World Bank shows that inequality increased sharply in Mexico between 2010 and 2014 after declining for a decade. Over the last 20 years, Mexico’s per capita GDP grew at an average rate of 1% annually as it wobbled and recovered from multiple crises. At the same time, the value of the assets owned by Mexico’s 16 wealthiest individuals increased five-fold.

In 2002, the assets of Mexico’s elite 16 were worth 2% of the country’s GDP. By 2014 these private fortunes accounted for 9% of GDP. Overall, the wealthiest 1% of Mexico’s population now earns more than one-fifth of the country’s total income. The net effect has been that as Mexico’s economy has transformed since the early 1980s, inequality has actually increased.

Mexico's economy is expected to grow by around 2.7% in 2016.

In a recent research report boutique economic consultancy FocusEconomics explains, "Notwithstanding an incipient impact from some structural reforms and a strong uptick in private consumption and credit growth, it is highly unlikely that a stronger rebound in GDP will materialize in 2016." Despite impressive activity in beer production, tech services, and automotive exports Mexico's economy is likely to be dragged down by weak external demand, low oil prices, and additional cuts to government spending. In Mexico the future is always bright. Economic growth in 2017 could top 3.1%. For now, however, the most dynamic segment of the market continues to be the luxury sector.

Walking past cases filled with watches from brands such as Jaeger-LeCoultre and Cartier Salcido told me, “We see luxury growing. We are very clear we want to sell high-end luxury. You target high-profile customers and then you have aspirational customers who are discovering the brands.”